Economic cushion now could deepen crisis later

By IBT Staff Reporter01/30/09 AT 4:27 PM

Economic activity fell the most since 1982 at the end of last year but it was not as bad as expected as unsold goods from private businesses grew, raising concerns that higher inventories now may result in a steeper slowdown in the coming months.

The economy contracted by 3.8 percent in the fourth quarter of 2008, the Commerce Department reported today. Analysts had expected a 5.4 percent decline. Not counting inventories -- which accounted for 1.3 percent of the growth in that period --- economic activity would have fallen 5.1 percent.

The difference between 3.8 and 5.1 percent is the inventory buildup, Nigel Gault, chief United States economist at IHS Global Insight, said, according to the New York Times. My only explanation is that companies could not cut production fast enough.

The build-up in inventories muted the decline in GDP, but that becomes a drag going forward. It creates concern that it might take longer to get out of this mess, noted Eric Kuby, chief investment officer at North Star Investment Management Corp. Reuters reported.

The inventories buildup in the fourth quarter amounted to $6.2 billion. It was the first gain in more than a year. Inventories had been falling sharply in the previous quarters. The third quarter saw a decrease of $29.6 billion and a $50.6 billion decline in the second.

The Gross Domestic Product fell 0.5 percent in the third quarter. In 2008 the GDP rose 1.3 percent, the weakest since 2001.

The U.S. economy entered into an economic recession in December 2007, seen as the worst since World War II.